# EUR-Lex - 52013DC0374 - EN

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# 52013DC0374

**Recommendation for a COUNCIL RECOMMENDATION on Slovenia's 2013 national reform programme and delivering a Council opinion on Slovenia's stability programme for 2012-2016 /* COM/2013/0374 final */**

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Recommendation for a

COUNCIL RECOMMENDATION

on Slovenia's 2013 national reform
programme
and delivering a Council opinion on Slovenia's stability programme for
2012-2016

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union, and in particular Articles 121(2) and 148(4)
thereof,

Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1], and in particular Article 5(2)
thereof,

Having regard to Regulation (EU) No
1176/2011 of the European Parliament and of the Council of 16 November 2011 on
the prevention and correction of macroeconomic imbalances[2], and in particular Article 6(1)
thereof,

Having regard to the recommendation of the
European Commission[3],

Having regard to the resolutions of the
European Parliament,[4]

Having regard to the conclusions of the
European Council,

Having regard to the opinion of the
Employment Committee,

After consulting the Economic and Financial
Committee,

Whereas:

(1)       On 26 March 2010, the European Council agreed to the
Commission’s proposal to launch a new strategy for growth and jobs, Europe
2020, based on enhanced coordination of economic policies, which will focus on
the key areas where action is needed to boost Europe’s potential for
sustainable growth and competitiveness.

(2)       On 13 July 2010, on the
basis of the Commission's proposals, the Council adopted a recommendation on
the broad guidelines for the economic policies of the Member States and the
Union (2010 to 2014) and, on 21 October 2010, adopted a decision on guidelines
for the employment policies of the Member States[5],
which together form the ‘integrated guidelines’. Member States were invited to
take the integrated guidelines into account in their national economic and
employment policies.

(3)       On 29 June 2012, the Heads
of State or Government decided on a Compact for Growth and Jobs, providing a
coherent framework for action at national, EU and euro area levels using all
possible levers, instruments and policies. They decided on action to be taken
at the level of the Member States, in particular expressing full commitment to
achieving the objectives of the Europe 2020 Strategy and to implementing the
country-specific recommendations.

(4)       On 6 July 2012, the
Council adopted a recommendation on Slovenia's national reform programme for 2012
and delivered its opinion on Slovenia's updated stability programme for 2011-2015.

(5)       On 28 November 2012, the
Commission adopted the Annual Growth Survey[6],
marking the start of the 2013 European Semester for economic policy
coordination. Also, on 28 November 2012, the Commission, on the basis of
Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic
imbalances, adopted the Alert Mechanism Report[7],
in which it identified Slovenia as one of the Member States for which an
in-depth review would be carried out.

(6)       On 14 March 2013, the
European Council endorsed the priorities for ensuring financial stability,
fiscal consolidation and action to foster growth. It underscored the need to pursue
differentiated, growth-friendly fiscal consolidation, to restore normal lending
conditions to the economy, to promote growth and competitiveness, to tackle
unemployment and the social consequences of the crisis, and to modernise public
administration.

(7)       On 10 April 2013, the Commission published the
results of its in-depth review[8]
for Slovenia, under Article 5 of Regulation (EU) no 1176/2011. The Commission's
analysis led it to conclude that Slovenia is experiencing excessive
macroeconomic imbalances. Urgent policy action is needed to halt the rapid
build-up of these imbalances and to manage their unwinding. Until now, the
levels of private and public debt are below the alert thresholds of the
scoreboard and also net external debt is relatively contained. However, the
problem is not in the debt level but in its structure, which is highly
concentrated in the corporate sector. In the context of accelerating negative
economic trends, this undermines financial sector stability and complicates the
deleveraging process, including through interlinkages with the level of
sovereign debt. These risks are compounded by limited adjustment capacity in
labour and capital markets and by an economic structure dominated by
state-ownership. Periods of policy uncertainty and legal obstacles to reforms
have prevented Slovenia from addressing its imbalances adequately and enhancing
its adjustment capacity, thus increasing its vulnerability at a time of heightened
sovereign funding stress.

(8)       On 9 May 2013, Slovenia submitted
its 2013 stability programme covering the period 2012-2016 and its 2013 national
reform programme. In order to take account of their interlinkages, the two
programmes have been assessed at the same time.

(9)       On 23 May 2013 the Slovene
authorities sent a letter to the Commission recapitulating, amending and clarifying
key commitments in the national reform programme.

(10)     Based on the assessment of
the 2013 stability programme pursuant to Council Regulation (EC) No 1466/97,
the Council is of the opinion that despite considerable although back-loaded
consolidation efforts that have brought the deficit down from 6.2% of GDP in
2009 to 4.0% of GDP in 2012, Slovenia is not expected to correct its excessive
deficit by 2013 as recommended by the Council in late 2009. This is notably
linked to a worse economic environment than expected at the time. The
macroeconomic scenario underpinning the budgetary projections in the programme
is broadly plausible for 2013, but optimistic for 2014. In particular, the
authorities anticipate that after a fall in GDP by 2.3% in 2012 and 1.9% in
2013, GDP will grow by 0.2% in 2014, while assuming that fiscal measures are
taken to reduce the general government deficit from 4.2% of GDP (excluding bank
recapitalisations) in 2013 to 2.6% of GDP in 2014. However, the Commission
forecasts that GDP will fall by 0.1% in 2014 based on a no-policy-change
assumption, a scenario which only takes into account measures that were adopted
by mid-April 2013, and forecasts a deficit of 4.9% of GDP for 2014. The main
objectives of the budgetary strategy outlined in the programme are to correct
the excessive deficit by 2014, one year after the deadline set by the Council in
late 2009, to achieve a balanced structural position by 2017 and stabilise the
debt ratio below 55% of GDP. The programme confirms the medium-term objective
(MTO), which is a balanced budget in structural terms. This MTO is not in line
with the requirements of the Stability and Growth Pact because it does not
adequately take into account the implicit liabilities related to ageing. The
planned headline deficit targets in the programme are consistent with a
correction of the excessive deficit by 2014. However, given the optimistic
growth forecast for that year, significant risks to revenue projections as well
as insufficiently specified expenditure measures, [the Council considers that
it is not likely that the excessive deficit will be corrected by 2014]. In
these circumstances, additional structural consolidation measures should be
specified, adopted and implemented to ensure that the excessive deficit is
corrected by 2015, at the latest in a credible and sustainable manner as
recommended by the Council [on 21 June 2013]. The general government
debt-to-GDP ratio more than doubled from 22.0% in 2008 to 54.1% in 2012 and is
projected to increase further to 66.5% by 2014 according to the Commission's
2013 Spring Forecast. The authorities expect the debt-to-GDP ratio to peak at
63.2% in 2014 and 2015 and then drop to 62.8% in 2016. Risks to the debt-to-GDP
ratio are tilted towards a higher ratio, also due to large contingent
liabilities and likely stock-flow adjustments from asset transfers to the Bank
Asset Management Company, which is not included in programme projections.

(11)     In May 2013, the authorities made important steps towards
the consolidation of public finances. They achieved an agreement with social
partners on an additional 11⁄4% reduction in basic gross wages in the public
sector, on top of the 3% reduction  that was agreed in the May 2012  Act on
Balancing Public Finances. Furthermore, Parliament approved a constitutional
basis for establishing a general government budget balance/surplus rule in
structural terms. However, the complete transposition of the provisions of the
Fiscal Compact will be made in a special constitutional implementation act, scheduled
for parliamentary approval by November 2013. Finally, Parliament almost unanimously
tightened the constitutional rules to call and win a referendum, which is
expected to facilitate the introduction of fiscal consolidation measures. Given
the rapidly increasing debt, it is all the more important that the 2013 budget
strategy is reinforced and strictly implemented, and that substantial
consolidation efforts are firmly pursued in subsequent years. While some taxes are below the EU average, reliance on tax increases
cannot indefinitely postpone the need to tackle expenditure dynamics. It therefore
seems appropriate to complement the revenue increasing measures with additional
fiscal efforts through structural expenditure cuts. The
medium-term budgetary framework and expenditure rule remain insufficiently
focused on achieving the MTO and securing long-term sustainability. In addition, budget constraints on certain general government units,
especially indirect budgetary users, do not appear to be fully enforced.
Finally, international and domestic estimates suggest
that the size of the shadow economy in Slovenia is above the EU average, which
indicates room for improving tax compliance.

(12)     A pension reform was passed in December 2012 and entered
into force in January 2013. It addresses challenges identified in the 2012
recommendations, though not sufficiently as it is expected to have only a medium-term
impact on public finances (until 2020). While this pension reform is an
important step, it does not provide specific measures to contain age-related
costs beyond 2020. Further reform efforts are required to improve the
sustainability of pension expenditure in the long-term, including through
aligning the statutory retirement age with gains in life expectancy and by
further restricting early retirement. In the area of long term care, demand for
services outstrips supply while expenditure is still relatively low. Demand for
long-term care and related expenditures are projected to rise substantially in
light of the ageing trends. Further evaluations of existing measures would
contribute to  more evidence-based policy making in this area.

(13)     While the size of the Slovenian banking sector is
relatively small and less than half of the euro area average, the largest banks
experience sustained pressure on capital buffers, which remain low in regional comparison,
and their dependence on the state for capital is a substantial threat to the
economy. Repeated recapitalisation needs are concentrated in state-owned domestic
banks. While the levels of total private debt are below the euro-area average
and the alert thresholds of the macroeconomic imbalances scoreboard, the issue
is of structural nature. Most of the debt is concentrated in the corporate
sector and many companies are over-indebted, which leads to further rises in
non-performing loans. At the end of 2012, 23.7% of corporate loans were in
arrears of 90 days or more. Reviving credit to the corporate sector is needed
to facilitate investment, enhance productivity and competitiveness. Further
recapitalisations are foreseen in the stability programme. The authorities have
confirmed in writing the commitment to provide additional capital if needed.
Credit is contracting and the interaction between weak banks and the sovereign
has intensified. The interest rate on corporate credit (for loans above EUR 1m)
is more than 2 pps. higher in Slovenia than in the euro area as a whole and
this margin has increased again in 2012. Framework legislation for bank
restructuring was passed but still needs to be implemented effectively. The
Bank Asset Management Company (BAMC) remains the central institutional platform
for bank rehabilitation. The national reform programme, complemented by recent
information provided by the government describes plans for transfers to the
BAMC based on bottom-up stress tests performed by the Bank of Slovenia. The
authorities have confirmed in writing that they stand ready to work with the
Commission and the ECB to ensure that independent asset quality reviews are
conducted for a selection of banks. The exercise should be system-wide to ensure
lasting stability of the banking sector. In other countries such an approach proved
to be key to regain confidence, credibility and market access. Information
gained from a thorough, external assessment is a necessary basis for an overall
financial sector strategy.

(14)     The national reform programme does not describe any
additional steps to strengthen bank supervision, which was identified as
necessary in the 2013 in-depth review. In terms of supervisory actions
vis-à-vis banks, the only new information in the programme relates to the new
Bank of Slovenia stress tests. A further examination of measures such as appropriate
macro-prudential policies has not been provided.

(15)     A labour market reform was adopted in March 2013 to reduce
labour market segmentation and increase flexibility on the labour market. The
reform reduces protection of permanent contracts by simplifying dismissal
procedures in case of individual and collective dismissals and by reducing
dismissal costs. Regulation of fixed-term contracts has been further tightened
to reduce abuse, while the use of temporary agency work is restricted. Although
the reform goes in the right direction, it remains to be seen whether it is
sufficiently ambitious to have a significant impact on labour market segmentation
and flexibility, and on Slovenia's attractiveness for foreign direct
investment. No measure has yet been taken to address the dual labour market
caused by student work regulation. The national reform programme proposes measures
in the right direction. The youth unemployment rate in Slovenia increased
strongly, by 4.9 pps. to 20.6% in 2012, while the unemployment rate increased
by 0.7 pp. to 9% in 2012. Despite rising unemployment, the number of unemployed
people participating in active labour market policy measures, co-financed by
the European Social Fund, decreased considerably in 2012 according to the
preliminary national data. No measures have been taken to adapt work
environments to longer working lives and no tailor-made lifelong learning or active
labour market measures have been adopted to increase employment of young
tertiary graduates, older workers and low-skilled workers. Slovenia has taken
some measures to improve matching of skills to labour market needs. A pilot
project on how to evaluate those needs is being carried out by the Public
Employment Service but the cooperation with stakeholders needs to be further
developed. More is needed to improve the attractiveness of relevant vocational
education and training programmes.  Additional career orientation measures in
SMEs are also being implemented. The role of employers in vocational education
and training still needs to be strengthened. Improvements in these areas would
increase productivity and competitiveness.

(16)     Policy action to improve cost-competitiveness has only been
partial. In 2012, the government cut nominal gross wages per employee in the
public sector by around 3%. A further reduction of labour costs in the public
sector was agreed with social partners in mid-May 2013.  The minimum wage is
among the highest in the EU as a percentage of the average wage, is indexed to inflation,
and was subject to a large discretionary increase in 2010. Although the growth
rate of nominal compensation per employee was negative in 2012 (-0.4%) nominal
unit labour cost (NULC) registered a moderate positive growth in 2012 (0.7%)
due to more negative productivity growth (-1.1%). Measures to lift productivity
growth and sustained progress in reducing unit labour costs would help to regain
competitiveness.

(17)     State ownership has a significant role in the Slovenian
economy with many features remaining unchanged since the transition period of
the 1990s. The privatisation and corporate restructuring tools adopted during
the 1990s resulted in the state remaining dominant, especially in the financial
sector. In 2011, state-owned enterprises accounted for one sixth of total value
added of the Slovenian economy, around half of the total losses in the
corporate sector, and employed one out of eight people. Moreover, state-controlled
funds and enterprises have an impact on public finances through the interaction
of elevated debt levels, recapitalisation needs and significant government
guarantees. The size and weakness of state-owned enterprises hold back economic
development and growth and contribute to existing imbalances. State dominance
and a frequently malfunctioning governance of state assets impede private
domestic and foreign investment, lowering productivity and competitiveness. The
cross-ownership of state-owned enterprises in the non-financial sector with
state-owned financial institutions creates contagion risks, limits adjustment
and distorts resource allocation, especially with regards to new investment.

(18)     The national reform programme outlines policy priorities in
the areas of state ownership and corporate deleveraging, but it does not provide
details of measures planned. The 2013 in-depth review outlined the economic
outcomes in relation to state ownership, in terms of direct and contingent fiscal
costs, and in terms of distortion of normal commercial operations. However, the
national reform programme cites only the lack of co-ordination as a drawback to
the state's conduct as an owner of non-financial enterprises. Overall, while the
national reform programme contains positive elements, it does not provide
sufficient information regarding the strategic orientation for companies that
will remain in state ownership, and detailed, time-bound commitments to improve
their financial performance and management. Some first steps have been taken to
improve corporate governance, as recommended in the 2012 country-specific
recommendations, and to privatise some state-owned enterprises. Legislation providing
for the establishment of the future Slovenia Sovereign Holding (SSH) was
enacted, but still needs to be implemented effectively. A register of
management and supervisory board appointments in state-owned enterprises with
requirements for disclosure of interests could help to increase transparency. The
national reform programme announces the preparation of a privatisation strategy
by the final quarter of 2013, which will be brought forward to the third
quarter, following the letter of 23 May 2013. In the meantime, the government
has proposed to Parliament a list of 15 companies for privatisation. Besides
minority stakes and SMEs, this list includes also important companies like the
second largest bank, NKBM.

(19)     Slovenia has a high number
of regulated professions and there is scope for a significant reduction of
entry barriers which would have a positive effect on employment and
competition. The Slovenian authorities launched a reform process in 2012 to
review numerous regulated professions  with the objective of better defining
existing regulated professions, reducing administrative costs and simplifying
access to professions. A first set of laws in the field of craft, tourism and
construction was due to be adopted by Parliament in early 2013. However, the
reform is behind schedule except for the craft sector. Slovenia
has set the legal pre-conditions for an independent Competition Protection
Agency but still needs to ensure that appropriate staff levels will be
continuously ensured. The legislation should be further amended to give the
agency a separate budget line, as this is necessary to ensure its financial
independence. First instance judicial proceedings in
litigious civil and commercial cases as well as bankruptcy procedures are
unduly long. Despite a visible positive trend in shortening lengths of civil
and commercial cases continued effort is needed to address these issues, as
they hamper business activity and reduce Slovenia's attractiveness for foreign
direct investment. In this context, the foreseen cut in the number of judges
per inhabitant as set out in the national reform programme would have to be
counterbalanced by significant increases in effectiveness.

(20)     The national reform
programme asserts the need to restructure non-financial corporations in
financial distress but the policy challenge and the policy response regarding
corporate restructuring need further elaboration focusing on market-based
solutions. Additional measures are needed to attract private investment,
including foreign direct investment, and to ensure sufficient private burden-sharing
preserving taxpayer resources. The restructuring process should lead to the
sale of the restructured companies without involvement of public funding,

(21)     Slovenia is in the process
of amending legislation to increase the efficiency of insolvency procedures.
The government amended the law on Financial Operations, Insolvency Proceedings
and Compulsory Dissolution Act in April 2013. The amendments refine the
definition of insolvency and introduce incentives for managers to file for
insolvency on time. The current insolvency framework has insufficient
incentives and sanctions to ensure that companies file for insolvency at an
early stage. The compulsory settlement procedures (in-court reorganisation) are
complex and debtor-friendly, particularly for SMEs and micro companies. There
are insufficient incentives for early out-of-court settlement, which could help
to ensure the continuation of viable businesses. New legislation has been
announced to allow for financial restructuring of over-indebted companies early
in the process, and legal changes to facilitate out-of-court restructuring and
debt conversion will be proposed by the Ministry of Justice by end of May 2013.
A suitable legal framework which provides compatible incentives for creditors,
owners and management would be essential to facilitate the financial restructuring
of illiquid but viable companies.

(22)     In the context of the
European Semester, the Commission has carried out a comprehensive analysis of Slovenia’s
economic policy. It has assessed the stability programme and national reform programme,
and presented an in-depth review. It has taken into account not only their
relevance for sustainable fiscal and socio-economic policy in Slovenia but also
their compliance with EU rules and guidance, given the need to reinforce the
overall economic governance of the European Union by providing EU-level input
into future national decisions. Its recommendations under the
European Semester are reflected in recommendations (1) to (9) below.

(23)     In the light of this
assessment, the Council has examined Slovenia's stability programme, and its
opinion[9]
is reflected in particular in recommendation (1) below.

(24)     In the light of the
Commission's in-depth review and this assessement, the Council has examined the
national reform programme and the stability programme. Its recommendations
under Article 6 of Regulation (EU) No. 1176/2011 are reflected in all recommendations
below.

(25)     In the context of the
European Semester the Commission has also carried out an analysis of the
economic policy of the euro area as a whole. On this basis the Council has
issued specific recommendations addressed to the Member States whose currency
is the euro. Slovenia also should ensure the full and timely implementation of
these recommendations.

HEREBY RECOMMENDS that Slovenia should
take action within the period 2013-2014 to:

1. For the year 2013 and beyond, implement and reinforce the budgetary
strategy, supported by sufficiently specified structural measures, to ensure
the correction of the excessive deficit by 2015 in a sustainable manner and the
improvement of the structural balance specified in the Council recommendation
under the EDP. After the correction of the excessive deficit, pursue a
structural adjustment effort that will enable Slovenia to reach the MTO by
2017. Durable correction of the fiscal imbalances requires the implementation
of ambitious structural reforms, which would increase the adjustment capacity of
the economy and boost potential growth and employment. Safeguard
growth-friendly spending, adopt measures to improve tax compliance and
implement measures on the expenditure side underpinned by systematic reviews of
public expenditure at all government levels. To improve the credibility of
consolidation, complete the adoption of a general government budget
balance/surplus rule in structural terms, make the medium-term budgetary
framework binding, encompassing and transparent, and strengthen the role of
independent bodies monitoring fiscal policy by end 2013. Take measures to
gradually reduce the contingent liabilities of the state.

2. Strengthen the long-term sustainability of the pension system beyond
2020 by further adjusting all relevant parameters, including through linking
the statutory retirement age to gains in life expectancy, while preserving the
adequacy of pensions. Contain age-related expenditure on long-term care and
improve access to services by refocusing care provision from institutional to
home care, sharpening targeting and means-testing of benefits, and reinforcing
prevention to reduce disability/ dependency.

3. Ensure that wage developments, including the minimum wage, support
competitiveness and job creation. Monitor closely the effects of the recent
labour market reform and if necessary identify the areas where further action
is needed to foster job creation and tackle segmentation, including through the
regulation for student work. Take further measures to increase employment of
young tertiary graduates, older persons and the low-skilled by focusing resources
on tailor-made active labour market policy measures while improving their
effectiveness. Address the skills mismatch by improving the attractiveness of
the relevant vocational education and training programmes and by further developing
cooperation with the relevant stakeholders in assessing labour market needs.

4. Take the necessary steps, with input from European partners, to
contract an independent external adviser by June 2013 to conduct a system-wide bank
asset quality review. Complete this exercise in 2013, with faster progress in
the cases of the two banks already subject to the state aid procedure, to accelerate
their balance sheet repair. Stand ready to provide additional capital should
the asset transfer or asset quality review reveal additional shortfalls. All
measures, including objective assessments of capital needs, transfer of assets
to Bank Asset Management Company, asset protection scheme, operational
implementation of the restructuring measures should be implemented in full
compliance with state aid rules in case state aid is involved. In parallel,
develop by March 2014 and implement a comprehensive sector strategy to ensure
arms-length management of reformed banks and to substantially improve
governance, risk management and profitability in the sector, including through
consolidation where appropriate. Swiftly proceed with preparations for the
announced privatisation of NKBM and establish, by September 2013, an ambitious
timetable for the divestment of direct and indirect state shareholdings of
banks.

5. Review the bank regulatory framework by end 2013, and based on this
review, strengthen supervisory capacity, transparency and statistical
disclosure.

6. Accelerate the reform of regulated services, including a significant
reduction of entry barriers. Improve the business environment, including
through ensuring the independence of and providing sufficient and autonomous
financing to the Competition Protection Agency.

7. Build on previous efforts to further reduce the length of judicial
proceedings at first instance in litigious civil and commercial cases and the
number of pending cases, in particular enforcement cases.

8. As part of the planned strategy of the government, to be completed
by September 2013, classify core and non-core state assets according to
economic criteria, with a view to divesting non-core assets. Make the Slovenia
Sovereign Holding (SSH) fully operational in a timely manner, and transfer both
ownership and management of all stakes to the SSH, potentially excluding those that are on the list for immediate
full privatisation. Ensure professional management of
the SSH from the outset, potentially including
international expertise, and a clearly defined arms' length relationship with
the companies involved. For core stakes, develop sector-specific strategies to
improve profitability and corporate governance. Introduce an obligatory and
publicly available register of management and supervisory board appointments in
state-owned enterprises with requirements for disclosure of interests. Ensure
that the regulatory framework facilitates divestment of non-core state assets
and that administrative hurdles are minimised.

9. Identify and start to work on removing all existing legal and
administrative impediments to sustainable restructuring of over-indebted/undercapitalised
but viable companies through market-based solutions. In this context, take
measures to ensure sufficient private burden sharing, to increase private
investment, including foreign direct investment, and to achieve efficiency
gains in troubled companies as part of the restructuring process. Adopt the
necessary legal framework for out-of-court restructuring by September 2013,
ensuring that it is coherent with the existing provisions on insolvency and provides
incentives for both creditors and shareholders to reach out-of-court
restructuring agreements. Improve the enforcement of corporate insolvency
procedures and in-court settlements, including swiftly resolving pending court
cases related to bankruptcy procedures, in order to maximise recovery value and
to facilitate the timely and efficient resolution of non-performing loans.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 209, 02.08.1997, p. 1.

[2]               OJ L 306, 23.11.2011, p. 25.

[3]               COM(2013) 374 final.

[4]               P7_TA(2013)0052 and P7_TA(2013)0053.

[5]               Council Decision 2013/208/EU of 22 April 2013.

[6]               COM(2012)750 final.

[7]               COM(2012)751 final.

[8]               SWD(2013) 122 final.

[9]               Under Article 5(2) of Council Regulation (EC) No
1466/97.